The CFTC told designated contract markets to put prophylactic trading rules in place before listing mention markets, New York has added prediction market operator Polymarket to its landmark lawsuit, and Kalshi pushed back with a 1,800-word denial.
Prediction markets face a two-front regulatory assault: the CFTC’s 22 September advisory flags mention markets as prone to manipulation, while New York seeks at least $4.6 billion from Polymarket and a further $100,000 for each future sports wagering attempt in the state.
- The CFTC Advisory on Mention Markets
- New York Sues Prediction Market Operator Polymarket
- Kalshi Rejects Wash Trading Allegations
- What the CFTC Says About Its Own Limits
Mention markets let traders bet on whether a US official will utter a particular phrase during a given speech, and the CFTC now says such prediction markets are highly prone to manipulation. In a staff advisory dated 22 September, the agency pointed to contracts where the settlement turns on the discrete conduct of a single individual and warned that they may be neither independently generated nor externally verifiable. Designated contract markets, which under the Commodity Exchange Act must abide by 23 core principles, are expected to put prophylactic trading rules in place before listing these contracts. The CFTC expects operators to implement rules designed to detect and deter manipulation. The advisory also stresses that it creates no enforceable rights or substantive or procedural matters and provides no no-action position, meaning exchanges must act on their own volition. As a result, the regulatory volleying between Washington and New York is moving fast, and Kalshi has spent the last week defending its volume.
The CFTC Advisory on Mention Markets
The advisory zeroes in on a narrow but expensive corner of prediction markets: contracts whose outcome depends on one person’s words. The CFTC argues that where settlement turns on the discrete conduct of a single individual, the contract may be neither independently generated nor externally verifiable, which strips away the two checks that make a market trustworthy. Gabriel Perez, a longtime White House staffer, allegedly traded mention markets tied to Trump speeches using advance knowledge of the text, and the agency has now served notice Arden Consult that the markets carry a heightened risk of manipulation.
The agency’s logic follows a clear line. If an official knows what will be said before the speech, the trade is not really about the event at all, so the contract rests on information that cannot be verified from outside the room. That is why the CFTC wants designated contract markets to adopt prophylactic trading rules before listing these instruments rather than after a manipulation complaint arrives. In contrast with sports event contracts, where outcomes are verifiable from broadcast footage, mention markets depend almost entirely on insider knowledge of the speaker.
According to the CFTC, the advisory is not intended to be relied upon to create any rights, substantive, or procedural matters enforceable by law, nor does it provide any no-action position. That carve-out matters practically, because it means an exchange that lists a mention market after the advisory has been published has no safe harbour and faces full CFTC oversight. The memo reads: DCMs interested in listing mention markets should implement prophylactic trading rules designed to detect and deter manipulation.
New York Sues Prediction Market Operator Polymarket
When New York Attorney General Letitia James filed her groundbreaking suit against Kalshi in July, the prediction markets operator was the only one facing state action of that scale. Following an investigation by the Office of the Attorney General, James added Polymarket to the list of operators she is taking to court, and Governor Kathy Hochul, who is up for re-election in November, announced that the state is suing the platform for running an illegal gambling operation.
Hochul singled out a policy that lets 18-to-20-year-olds trade on event contracts as particularly offensive, since New York makes it illegal for anyone under 21 to wager on sports. The AG’s statement is blunt: by running an unlicensed gambling operation, Polymarket has done more than just knowingly violate state law, it has put New Yorkers at risk.
The financial demands are substantial. James is seeking at least $4.6 billion in damages, which is far below the $36 billion New York has asked for from Kalshi. She is also pressing for treble damages and pre-violation penalties, plus restitution and a fine of $100,000 for each attempt or offer of sports wagering in New York, as well as fines of three times any gains Polymarket made in the state. In contrast with Kalshi, which is fighting a different set of issues, this is a licensing and age-access case wrapped in a gambling-operation claim.
Kalshi Rejects Wash Trading Allegations
A former quantitative trader on social media ignited a firestorm over the weekend after alleging that Kalshi manipulated its volume on crypto and perpetual futures trades over the last month. The reports coincided with a Wall Street Journal analysis, which found that more than a third of the platform’s perpetual trades clustered around the same order size of $5,500, with those orders totalling $5 billion in volume across the month. Kalshi was forced to respond publicly.
The company rejected the claims outright in a 1,800-word release titled The Facts Behind Kalshi’s Perpetual Volume. Kalshi explained that it pays market-makers a flat fee across a host of perp markets to keep resting liquidity available, and that individuals have no incentive to wash trade because the incentives reward resting liquidity rather than volume traded. In a statement, the platform wrote that it mechanically blocks self-trades and has surveillance watching for pre-arranged trades with a partner, adding that it has seen no evidence of collusion or wash trades. The platform also filed with the CFTC on Tuesday, asking approval to replace full-collateral requirements with risk-based margin trading on certain contracts.
The company’s explanation is plausible on its face, but the $5,500 clustering does not disappear merely because Kalshi says so. A 1,800-word denial is a legal defence, not market data, and the pattern reported by the Journal is exactly the shape a wash trading scheme would take. The CFTC did not confirm, nor deny, whether it has launched an investigation into the matter. That silence is uncomfortable for anyone reading the story, because the agency is simultaneously warning designated contract markets about manipulation while refusing to state whether it is already pursuing one.
What the CFTC Says About Its Own Limits
The agency was careful to bracket the scope of its own document. The memo states that the advisory is not intended to be relied upon to create any rights, substantive, or procedural matters enforceable by law, and that it does not provide any no-action position. That disclaimer is unusual, because it tells exchanges that the advisory offers no comfort and no roadmap, only a warning that mention markets may be listed wrongly and may need prophylactic trading rules.
For the operators, the practical effect is clear following the advisory. The CFTC expects designated contract markets to implement prophylactic trading rules designed to detect and deter manipulation, and under the Commodity Exchange Act those exchanges must comply with 23 core principles, including Core Principle 3, which prohibits listing contracts that are readily susceptible to manipulation. Mention markets, by the CFTC’s own description, fit the pattern that Core Principle 3 targets.
The sequencing matters, so prediction markets operators will now spend real money on surveillance and contract design before the next listing. In contrast, the two regulatory fronts are moving at different speeds: the CFTC has published, but New York’s Polymarket suit is still in early stages, with the company already attempting to move it to the US District Court for the Central District of New York while filing a countersuit against James and the New York State Gaming Commission. Whether the prophylactic rules survive that process will be a useful test of whether the advisory changes anything at all.
Frequently Asked Questions
What is the CFTC advisory about?
Issued on 22 September, the advisory flags mention markets, contracts that trade on whether an official will say a particular thing in a public appearance, as highly prone to manipulation. It says the outcome may depend on one individual’s conduct and may be neither independently generated nor externally verifiable, and it tells designated contract markets to implement prophylactic trading rules before listing them.
Why are mention markets considered risky?
Because settlement turns on the discrete conduct of a single person, an insider with advance knowledge of the speech can place risk-free trades. The CFTC says such contracts may not be independently generated and may not be externally verifiable, so nothing outside the room can confirm what will actually be said.
What will New York ask if Polymarket keeps offering sports bets?
James is seeking at least $4.6 billion in damages from Polymarket, plus three times any gains made in the state and pre-violation penalties. For each attempt or offer of sports wagering in New York, she is asking for a $100,000 fine. New York has sought $36 billion from Kalshi, far more than from Polymarket, but the Polymarket suit is still moving through the courts.
Where does the Polymarket case stand now?
Following the Office of the Attorney General investigation, Polymarket sought to move the New York lawsuit to the US District Court for the Central District of New York. On the same day it filed a countersuit against Attorney General Letitia James and officials from the New York State Gaming Commission. Chief legal officer Neal Kumar called the action a recycled lawsuit and said the company would fight for its users, while James and Hochul asked the court for treble damages and restitution.
Does Kalshi admit to wash trading?
No, it denies the claims in a 1,800-word release. Kalshi says it pays market-makers a flat fee across perp markets to maintain resting liquidity and that the incentives reward liquidity rather than traded volume. It states that it mechanically blocks self-trades and monitors pre-arranged trades with partners, but the Wall Street Journal reported that more than a third of perpetual trades clustered at $5,500 orders totalling $5 billion in a month.
Does the CFTC advisory create binding rules?
The memo says it does not. The CFTC states that the advisory is not intended to create any rights, substantive, or procedural matters enforceable by law and provides no no-action position, so it is not a binding rule. The agency still expects designated contract markets to adopt prophylactic trading rules that detect and deter manipulation, and Core Principle 3 of the 23 core principles already prohibits listing contracts susceptible to manipulation.
What happens next for prediction markets?
Exchange operators will have to decide whether mention markets stay listed, and they will need to show that their prophylactic rules can detect manipulation. New York’s Polymarket case is heading to federal court after the company countersued, while Kalshi asked the CFTC to approve risk-based margin trading in place of full collateral on certain contracts. Kalshi also faces the $5,500 order clustering that the Journal reported, and the CFTC has neither confirmed nor denied an investigation into the wash trading allegations.
This article has been thoroughly researched and reviewed by the CasinoBait editorial team to ensure accuracy and relevance for Asian casino players.
